Iron Ore Prices May Rise, Spur China's Shagang to Consider Production Cuts

Prices of iron ore, trading near a two-year high, may continue to climb and lead to production cuts and losses for Chinese steelmakers.

The raw material price may keep rising in the second and third quarters, Deng Qilin, chairman of the China Iron & Steel Association, said today in an interview in Beijing while attending a conference. Jiangsu Shagang Group Co., the nation’s fifth-largest steelmaker, will consider reducing production on higher costs, Chairman Shen Wenrong said.

The global economic recovery has spurred demand for iron ore and allowed Vale SA and BHP Billiton Ltd. this year to break with a 40-year custom of selling on annual contracts and win a 90 percent price increase for quarterly sales starting April 1. Crude steel output in China, the largest maker, jumped 25 percent in the first quarter.

“Chinese steelmakers may face major difficulties in the second half,” said Xu Lejiang, chairman of Baosteel Group Corp., China’s second-biggest steelmaker. “The cost pressure is very high” and there are concerns over the demand impact should the government raise interest rates and withdraw stimulus spending, he said.

The Chinese government in the past month moved to cool its real estate market after prices surged and the fastest economic growth in almost three years stoked concerns of an asset bubble.

The executives were attending the sixth China International Steel Congress.

Steel Demand

Chinese prices of reinforcing bars, used in buildings, have dropped 2.4 percent from a nine-month high on April 14, as China banned loans for third-home purchases, raised mortgage rates and down-payment requirements.

“China’s stimulus policies on car and appliance consumption are still in place, but if people don’t buy houses, who will buy appliances?” Baosteel’s Xu said.

Construction will account for about half of steel demand in the nation in 2010, according to the Chinese Academy of Engineering. Light manufacturing and automakers account for about 7.7 percent and 4 percent of consumption, the academy said.

“Production cuts may happen,” should Shagang be unable to buy iron ore at less than $170 a metric ton, Shen said.

Iron ore for immediate delivery fell 1.3 percent last week to $183.50 a ton, according to Metal Bulletin. It touched $189.50 a ton for the week ended April 30, the highest since March 2008. Import prices, which include contract and spot levels, averaged $96.31 in the first quarter, the China Iron & Steel Association said April 28, an increase of 20.7 percent from a year earlier.

Largest Exporters

Vale, BHP Billiton and Rio Tinto Group, the three largest exporters of iron ore, threatened to cut supplies to China unless steelmakers accept their price demands, according to the steel group last month.

All Chinese steelmakers have signed quarterly contracts for iron ore or have other provisional agreements in order to obtain supplies for production, Shagang’s Shen said, reiterating comments made in April.

“The iron ore market is still very undersupplied,” BHP Billiton Chief Executive Officer Marius Kloppers told Australian Broadcasting Corp.’s Inside Business program today. “The price in absolute terms is actually quite high. That is passed through to steel prices being quite high in absolute terms.”

“If I look at forward trade activity, the trade patterns indicate that it will stay more or less at the levels that we’ve got now,” Kloppers said.

The price forecast by the China Iron & Steel Association contrasts with one made by UBS AG last month, which had said prices may drop 30 percent in coming weeks on concern China’s economic growth may slow.

--Helen Yuan and Xiao Yu, with assistance by Gemma Daley in Canberra. Editors: Tan Hwee Ann, Mark McCord.

To contact the Bloomberg News staff on this story: Helen Yuan in Shanghai at hyuan@bloomberg.net Xiao Yu in Beijing at yxiao@bloomberg.net

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